The Fed Cannot Hold Interest Rates Down Without QE to Infinity

JPMorgan (and Goldman Sachs) being bullish on gold is all you need to know. Goldman is long paper and JPMorgan is long physicals. Both have recently issued a buy signal to their clients. This should ignite a move to the long side by the hedge funds. Below is an article from Zero Hedge:

One of the most underreported sentiment shifts of the past week was JPM’s announcement late on Friday, that the firm quietly went long commodities – specifically base metals and copper (in addition to energy) – and the firm also closed it “sell” (i.e., underweight) in precious metals. This is not surprising: we had noted the ongoing purchasing of gold by JPM over the past two month (in part to restore its depleted gold vault inventory) when the yellow metal not only stabilized but promptly entered a bull market, returning 20% in a short period of time. And as gold was rising, JPM was advising its clients to sell. It seems JPM now has more than enough gold stashed away, and as the September shock is set to unwind, even JPM may be seeking the safety of gold, and the usual other hard asset suspects, if and when events escalate out of control, resulting in another “risk off” phase.

As the Fantasy Dies, Panic Will Ensue

A few years ago, I flew to Seattle to meet legendary hedge fund manager Bill Fleckenstein. For many years, Bill ran a very successful shorting-hedge fund, and he writes a high quality daily blog on economics and investing. Early on, he was one of the few people that were involved in the stock market, who also appreciated and understood gold and silver. He wrote a highly acclaimed book titled Greenspan’s Bubbles. The book is a devastating analysis of the Fed, under Alan Greenspan, and it went a long way toward explaining the causes of the 2008 meltdown.

We see things very much the same way, but there was one notable exception. He didn’t believe the Fed or the bullion banks conspired to hold down the price of gold and silver. As far as he was concerned, gold and silver were just “things,” no different from any other commodity. The banks and hedge funds just traded them for a profit like any other commodity. Both Fleckenstein and my friend Trader David R said they were friends with the gold and silver traders at JPMorgan and JPM did NOT have an agenda. They both also said a strong bullish case could be built for the metals without adding conspiracy to the mix.

I hold Fleckenstein in very high esteem. I know him personally and have visited him twice in Seattle. He is not only charming; he is non-conventional and very, very successful. He runs a very casual, laid-back office, much like we do at Miles Franklin. I don’t think you could find a sport coat or a tie there under any circumstances. That said, I wore a blue blazer to his office the first time I met Bill, but I also wore a pair of jeans.

I pay careful attention to what he has to say – especially when he talks about gold. He is not in my industry but he has great insight on gold, silver and the economy. He trades short-term for a living but he also is keenly aware of the big picture. He runs a highly respected and successful hedge. He limits the number of participants and dollars he accepts into his fund because he says he can trade in and out of the market quickly when he is dealing with smaller blocks of stock. He prefers to be nimble, and it’s a strategy that has worked out very well for him.

Fleckenstein is a regular guest on King World News. His current interview is entitled, As the Fantasy Dies, Panic Will Ensue. In the interview, he predicts that the current frightening 24% unemployment in the United States will get much worse in the near future as people realize the Fed is trapped. That’s when the “great unwind” begins. Remember, Bill wrote a book on Greenspan and the Fed and he understands them better than most. He warns that:

The economy will not be able to handle higher interest rates and that’s why if the Fed tapers and the bonds start acting funny, they will end tapering because they will start thinking, ‘Geez, we can’t have this happen.’ Then more people will draw the conclusion – and that is the fact that the Fed has overdone it.

Now, not everyone will conclude that and they won’t conclude it right away. And the Fed will fight that, and they will keep printing, but we will be on our way to the 1970s. Maybe people will start to look at the stagflationary environment that we actually have, the horrendous job growth, weak GDP, and inflation that’s probably twice as high as whatever real GDP is, and it will be seen as stagflation, and that will have consequences.

But right now, people continue to believe that the same idiots that created all of these problems, namely the central banks, are going to somehow get us out of it with the exact same policies that got us into it, only at a much higher (aggressive) level of pursuing those policies.

We’ve had so much artificial stimulus, and we’ve misallocated so much capital. And over the couple of decades we’ve been doing this we’ve kind of broken the economy and the financial system. So, I don’t think you can worry about what’s on the other side. We haven’t even gotten people to understand the charade that we have.

What the masses have done over and over again is to believe one more time that it’s all going to be OK … We are in a unique moment in history. The whole world is printing confetti, and (yet) people seem to think that’s going to work out fine.

And when it comes to gold and silver, he says:

Americans see no need to own it (gold). We’ve got massive debasement going on around the world. All of your listeners (and readers) understand the bull case for the metals.

I think the bear market that had been going on for a couple of years ended in late June, and now it’s the early stages of a bull market (in gold). When it is going to do something more sensational on the upside I can’t say. We’ve rallied 20% off the bottom, and now gold is backing and filling.

What will be the catalyst for the next leg up? Probably something that revolves around the FOMC Meeting. Either they (the Fed) will taper slightly and the market will go down a little, or not if people realize that the tapering has (already) been discounted. Or they won’t taper and people will finally realize how trapped they (central planners) are, and it (gold) will go wild (to the upside).

The fact of the matter is Americans, in the aggregate, don’t see any reason to own metal. They believe in the lunatics at the Fed, and the rest of the Western world is that way (as well). Obviously Asia doesn’t quite see it that way. But it’s understandable why the average American doesn’t buy gold — If they believe in a fantasy, why would they need it? As the fantasy dies, then they will understand the need to own gold.”

The KWN audio interview with Bill Fleckenstein is available here, at the following link: CLICKING HERE.

I am in agreement with his position on the economy, the direction of interest rates, the fate of the dollar and what it means for gold and silver. I also present John Williams (Shadowstats) data on inflation, unemployment and GDP to make sure that our readers understand they way these things really are. One’s perception of the economy is different using a 24% unemployment rate, instead of the published rate of 7.3%.

Since the beginning of Quantitative Easing, I have written that the Fed was boxing itself into a corner. There is no way the Fed can hold interest rates down without QE to infinity. Once they start to taper, the markets will react poorly. The Fed will quickly have to reverse course. That’s when Fleckenstein believes people will lose faith in the Fed’s ability to manage the economy and when they will start to consider gold.

But if the Fed continues with QE and creates a trillion (give or take) a year out of thin air to keep the economy, the bond market, the stock market and housing afloat, the dollar will tumble. They are in a no-win situation of their own making.

We are headed toward a new reality and it won’t be pleasant for most people. The culprit was the artificially low interest rate policy (actually negative interest rates) of Alan Greenspan, expanded upon by Ben Bernanke. They provided the liquidity that created the bubbles, starting with the crash of the stock market (NASDAQ) and then the housing market. But it doesn’t end there. The next one, and it will be the biggest bubble of them all, is the bond market (once foreigners stop purchasing our bonds and interest rates rise) and it is knocking on the door now. It will be the most devastating bubble of them all!

How far off is the bond market bubble from starting to deflate? It could be much closer that you think. Below is an article from Zero Hedge:

Yesterday we implied a difficult question when we illustrated the huge size of US Treasury bond holdings that China and Russia have between them – accounting for 25% of all foreign held debt – implicitly funding US standards of living (along with the Federal Reserve). The difficult question is “Can the U.S. really afford to greatly anger the rest of the world when they are the ones that are paying our bills?” What is going to happen if China, Russia and many other large nations stop buying our debt and start rapidly dumping U.S. debt that they already own? If the United States is not very careful, it is going to pay a tremendous economic price for taking military action in Syria.

Try and imagine what will happen when our 10-Yr. rates jump from 3% to over 4% and then to over 6%. What do you think will happen to the housing market, the stock market and the bond market? The Fed is “the buyer of last resort” and their QE bond purchases will have to increase to make up for the loss of buying from abroad. The days of the dollar as the world’s reserve currency, already under pressure, will come to an end. John Williams has warned that hyperinflation will be here by the summer of 2014. Well, if Obama launches an attack on Syria, it may be even sooner than he thinks. Here is an article from Zero Hedge below:

We have beaten this topic to death so we won’t say much more, suffice to say the chart below shows what is the key issue: too much monetization and it’s game over for the reserve currency; too little and it’s an uncontrolled market sell off, and with every passing week the margin for error gets less and less.

Last week the Fed owned $1.663 trillion in ten year equivalents, or 31.59% of total

This week the Fed owned $1.678 trillion in ten year equivalents, or 31.89% of total

In other words, the Fed’s holdings of the Treasury market, expressed though the correct 10 Year equivalent basis not the completely wrong total notional, rose by a whopping 0.3% in one week!

Annualize that (especially without a taper) to understand just how cornered the Fed now is (especially with the TBAC already complaining non-stop about lack of Treasury liquidity and eligible private-sector collateral).

This is all real. I am not presenting fairyland scenarios and I am not trying to scare you into buying gold and silver. When you look at the facts, you should be concerned, and also scared. Any event that affects our dollar affects us all. I hope you are taking the necessary steps to protect yourself. Time is running out for you to be able to move dollars into gold and silver at a reasonable price. A “hyperinflationary trigger” is as close as the first Cruise Missile we launch at Syria.

I can’t see Obama backing down now, in spite of all the opposition in Congress, throughout America, and with our allies. If he goes in alone, and attacks on his own, he has opened Pandora’s Box. There is a real possibility that Iran and Israel will be drawn into the conflict and the Middle East could go up in flames. Russia and China are watching closely, on the sidelines for now, but they have warned Obama not to attack Syria. This should not be taken lightly.

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